Thursday, 28 May 2009

Invest Skeptically has dug up a fascinating report The Business of Ageing by John Llewellyn and Camille Chaix-Viros on the implications of ageing populations. There is a lot of thought-provoking original research in the almost book length 136 page pdf from Nomura International plc published Nov.28, 2008. Topics covered include: life expectancy and health-in-old-age trends, retirement age trends and incentives, effect of pension liabilities on companies and asset prices, effects on bond/equity asset prices, currencies and real interest rates, a series of impact assessments on eleven major sectors from autos, through banks, leisure, media, real estate, insurance, food and general retail, media, healthcare and pharmaceuticals. Below are highlights from the report.

Population, Health, Working, Pensions

old no longer means age 65, it means 80 in terms of health and capability to work

people in their 60s and 70s are generally healthy and do not live a miserable, vegetable-like existence in a wheelchair waiting to die i.e. we can expect to more or less be ok and enjoying life till shortly before we die

the age of still being healthy has been rising faster than life expectancy - a greater proportion of our extended lives are healthy

four things that will add up to 14 years extra life: eat lots of fruits and vegetables, don't smoke, consume alcohol in moderation, exercise regularly

governments (for cost reasons) and companies (for cost and because older workers are good workers) will deploy incentives to retire later

an older population doesn't mean a decaying economy - there is a lot of room for quite capable older folk to go back to work, or to keep working instead of retiring early

life expectancy has been rising for many decades and probably will continue to do so

women outlive men - a fact evident since 1840 and there is no sign of that changing

life expectancy (average of the sexes) in 2050 will have risen to between 85 and 89 in all developed countries; even rampant obesity (the undisputed obesity champion being the USA with about 30% of the population being obese while Canada occupies 8th place at about 15% and the UK is 4th at 20% )

spending on healthcare only rises dramatically in the last 3 months of a person's life (US data)

people on defined benefit pensions retire earlier than those on defined contribution schemes

the official retirement age is likely to be raised progressively in most countries

"All the predicted problems in financing pension and health schemes that result from a rising old-age dependency ratio could be avoided. All that would be required would be to remove the public policy and private incentives that at present induce people to give up work sooner than they might freely choose to do." That last bit is interesting - people are induced in various ways to retire (like tax and income penalties for staying in work) when they otherwise might not. The problem all developed countries face could be fixed without nasty, punitive government action.

older workers can actually be better workers for companies: less absenteeism, less stealing, better customer service, more experienced / knowledgeable, less staff turnover, more profit, as the B&Q case study shows

Investment

"meltdown" is too strong a word to describe the idea that as boomers age and sell their investments (equities and bonds) for living expenses, asset prices will be driven down; there will be a muted effect on lowering asset prices

another way of saying this is that real interest are now at their lowest point and likely to rise - bond and equity yields will rise

current account surpluses in developed countries (= net savings = acquisition of foreign assets) will decline or stop and the money will be repatriated by boomer retirees for living expenses, which will drive up currencies of developed countries; a big question mark is whether the US will be the repository of demographically-induced savings to determine whether the USD appreciates along with other developed currencies, or depreciates by a lot. In the latter scenario, CAD also depreciates relative to other developed world currencies, but by less than the USD. In both scenarios CAD appreciates vs the USD over the next three or four decades. If this comes to pass, hedging US investments and leaving the rest of the world investments exposed to currency shifts is the correct strategy for Canadians.

the whole chapter on pharmaceuticals is a good primer on the industry

older people are big drug users, er consumers, for conditions like angina/hypertension, diabetes and cancer, which favours pharmaceutical companies; Eil Lilly and Novartis are said to be well-positioned with the right product mix

generic drugs will continue to gain importance and companies like Barr Laboratories and Mylan Inc to benefit, along with Novartis and Teva

auto companies will have to sell fewer but fancier cars to older folk

"We expect the beneficiaries of ageing populations to be mainly the large, well-diversified life insurers and specialist reinsurers with strong balance sheets" who will provide retirement products

older people spend a lot more on eating out and gambling(!) in their leisure expenditures than younger people

real estate - "we expect a shift from the suburbsand commutable locations to the countryside, and from colder to warmer climes, with a general selling down given that retirees tend to sell more homes than they buy"